The Policy Means What it Says
Mississippi Silicon Holdings, LLC appealed the district court’s grant of summary judgment in favor of Axis Insurance Company. The Fifth Circuit, in Mississippi Silicon Holdings, L.L.C. v. Axis Insurance Company, No. 20-60215, United States Court of Appeals for the Fifth Circuit (February 4, 2021) applied the clear and unambiguous language of the full policy.
Mississippi Silicon Holdings, LLC (“MSH”), a silicon metal manufacturer, was the victim of a cybercrime. In October 2017, MSH’s Chief Financial Officer, John Lalley, received an email from a regular vendor, Energoprom, advising that future payments should be routed to a new bank account. A letter relaying the same instructions, written on Energoprom’s letterhead and signed by an Energoprom executive, was attached to the email. The email body also contained previous emails between Lalley and Energoprom personnel concerning invoices and shipment details. Lalley thereafter authorized two wire transfers from MSH to Energoprom’s new bank account, totaling approximately $1.025 million. These payments were made in accordance with MSH’s three-step verification process for large transfers. First, Lalley initiated a transfer via the online banking system; second, another MSH employee confirmed the transfer on the bank’s website; and third, MSH’s Chief Operating Officer orally authorized the transfer on a phone call with a bank representative.
After discovering the fraud, MSH submitted a sworn proof of loss to Axis Insurance Company (“Axis”), claiming $1,025,881.13 under a commercial crime insurance policy that covered, among other specifics, Computer Transfer Fraud, Social Engineering Fraud, and Funds Transfer Fraud. Axis granted the claim pursuant to the Social Engineering Fraud provision and sent MSH a check for $100,000.00 (the policy limit for that provision) but denied that either the Computer Transfer Fraud or Funds Transfer Fraud provisions were applicable. Axis explained that the Computer Transfer Fraud provision did not apply because (1) the funds were transferred with MSH employees’ knowledge and (2) the fraud was accordingly not confined to the computer system, as the policy required.
MSH sued Axis for breach of contract based on the allegedly erroneous denial of Computer Transfer Fraud and Funds Transfer Fraud coverage.
The district court granted summary judgment for Axis, finding that, although the provision unambiguously “requires that the fraudulent act directly cause the loss,” the instant loss was caused not by the fraudulent computer use, but by the affirmative acts of MSH employees in initiating and authorizing the transfer. The court also concluded that the provision’s requirement that the transfer occur “without the Insured Entity’s knowledge or consent” was not satisfied, again because the transfers were initiated with MSH’s approval.
LAW & DISCUSSION
Under Mississippi law, an insurance policy is a contract subject to the general rules of contract interpretation. The primary concern is giving effect to the intent of the contracting parties. The inquiry begins with the four corners of the contract, focusing on the plain meaning of the contract’s language. Consideration of parol and extrinsic evidence is only permissible if the contract’s language is ambiguous.
The policy’s Computer Transfer Fraud provision reads: “The insurer will pay for loss of . . . Covered Property resulting directly from Computer Transfer Fraud that causes the transfer, payment, or delivery of Covered Property from the Premises or Transfer Account to a person, place, or account beyond the Insured Entity’s control, without the Insured Entity’s knowledge or consent.” (emphasis by court)
The policy defines “Computer Transfer Fraud” as “the fraudulent entry of Information into or the fraudulent alteration of any Information within a Computer System.” The mere receipt of an email does not constitute computer fraud in the context of similar insurance provisions. The Fifth Circuit noted that manipulation of emails in this manner does not constitute Computer Transfer Fraud as defined by the insuring agreement.
In addition the Fifth Circuit concluded that contract terms cannot be read in isolation. The policy means what it says: Coverage under the Computer Transfer Fraud provision is available only when a computer-based fraud scheme causes a transfer of funds without the Insured’s knowledge or consent.
Three MSH employees affirmatively authorized the transfer. It cannot be said that the fraud caused a transfer without the company’s knowledge.
Moreover, the policy already limited coverage in the manner MSH suggests. The policy admittedly anticipates situations in which one fraud could fall under various fraud-related provisions. The Social Engineering Fraud provision specifically contemplates situations in which an employee relies in good faith on a fraudulent instruction. The Computer Transfer Fraud provision does not. Instead, the Computer Transfer Fraud provision specifically disclaims coverage for transfers made with the insured’s knowledge. Had Axis intended to provide coverage in instances of Computer Transfer Fraud when MSH knew of the transfer but, in good faith, believed it to be legitimate, that provision would have said so, but it did not.
The court was required to read the entire policy including the integrated provision. By imposing the knowledge requirement, the policy narrowed the scope of the provision, limiting the types of computer transfer fraud that would trigger coverage to instances in which a computer itself is tricked into fraudulently transferring funds from MSH’s bank account to a third party without MSH’s knowledge. Coverage simply does not extend to the fraud scheme to which MSH fell victim.
The policy clearly and unambiguously precluded coverage.
The Fifth Circuit prudently read the entire policy, not a single provision or a single argument from the parties, and applied its clear and unambiguous language. It is not only refreshing, it is necessary, that appellate courts read the entire wording of the policy it is called upon to interpret and apply that language to the factual basis of the claim. The computer was not deceived, the officers and employees of the insured were deceived, a fraud not insured against by the insurer.
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
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